The Day Ahead: Calling the Market's Bluff

Bluffing is a must-have skill on the Vegas casino floor, in business-negotiation settings and definitely in investing. As the Godfather himself remarked, "Never let anyone outside the family know what you are thinking." The more I chat with those involved in the market and the more I crunch numbers on my own and analyze individual companies ahead of earnings season, the more it feels as if Mr. Market is a darn good bluffer.

Look at the cards recently dealt to Mr. Market, aka "The Dealer," unbeknownst to the individual sitting across the table -- the investor -- who has been folding their winning hands of short positions and cash.

Hand 1: 9% of all private-sector jobs are in the foodservice and drinking industry. Average weekly earnings for this group: 50% less than in other sectors of the private economy.

Hand 2: 598,000 of the 753,000 people that have landed jobs this year are part-timers.

Hand 3: The basic-materials sector was the third-worst performer last week, after utilities and telecom. That contradicts recently propagated views of a stabilized Europe and China.

Hand 4: The second-quarter profit at General Electric (GE) is likely to snap four quarters of accelerating growth.

But, as any good dealer knows, the bluff tends to work effectively only because a series of great hands have already been played and shown to opponents.

Don't get me wrong. I am skeptical about the sustainability equities' move off the June low -- especially given continued heightened volatility, tied to the rising yield on the 10-year Treasury. However, I haven't completely ruled out new long recommendations. They just have to be compelling opportunities coming from the proper sectors. For me, off-limit groups currently include utilities, telecoms, basic materials and industrials leveraged to heavy construction activities.

Why am I open to longs? There are a few reasons.

First, the Russell 2000 rose 1.4% Friday -- even as defensive stocks, and names trying to entice with yield, sucked wind. The small-cap index has also outperformed since the June 24 lows.

Source: Yahoo! Finance

Second, stock mutual-fund inflows have totaled $200 million through June 26.

Third, shares of automakers and auto-part names remain strong even in spite of rising rates. This is telling of real economic momentum that could be maintained in a post-excessive-quantitative-easing environment.

Fourth, equities have recently acted as if they can handle 10-year yields in the 2.5%-to-3% range.

Finally, railroad stocks have been solid outperformers. That's been most notable in Union Pacific (UNP) blue on the chart below) and Kansas City Southern (KSU) (in red).

Source: Yahoo! Finance

Lastly, an Inquiry

You own stocks. You eat, sleep and breathe the markets. So I am curious: If the CEO of the company were sitting in your living room, what would you ask and why?

I personally wouldn't ask what you might think I would -- for instance, I'd lay off any questions about numbers, growth estimates and so on. But send me an email with your question, and I will share mine.